Deeper Look At Some Overnight Data, Central Bank Moves

By Reshma Kapadia

Investors are used to parsing comments from Federal Reserve and the ECB, but lately they are paying closer attention tothemovements of Asian Central Bankers. Korea’s decision last night to keep interest rates unchanged at 3% . But HSBC economist Ronald Man notes that the bank’s accompanying statements sounded more neutral than dovish, with no explicit timing or possibility of another rate cut.

Man writes: “The Bank of Korea was likely weary that two consecutive rate cuts would signal panic to the market. By keeping rates on hold, the central bank is waiting for more data to see whether the recent strong downward momentum persists. The Bank of Korea indicated that growth momentum is ‘slackening’, and projected a continued negative output gap. This suggests that a downward revision could be made soon to its current 3.0% GDP growth forecasts for 2012. Such revision is likely to occur in October when it updates its economic projections, pointing to at least one more rate cut.” Man expects a 25bp cut to 2.75% in September.

Bank of Indonesia kept its rates unchanged, as well. Unlike Korea, economic growth has been relatively strong out of Indonesia.

Barclays expects the bank to keep rates unchanged through the year and said that while second-quarter GDP data came in stronger than expected it maintains its forecast of 6% growth for the year as it expects investments to moderate in the second-half of the year.

India’s industrial production contracted 1.8% from a year-ago, down from 2.5% in May.

Global headwinds and weak domestic investments will keep a lid on growth, according to HSBC’s economist Leif Eskesen. But unlike in other Asian countries, the Reserve Bank of India’s hands are tied by lingering inflation risk.. “Progress on structural reforms are key to re-invigorate growth.”

And more on China, from HSBC economists:

The disappointing July IP growth suggested China’s slowdown extended into 3Q, despite the initial effect of earlier easing measures to stabilise investment growth. China’s stablisation has yet to be secured, especially in light of rising external headwinds, ongoing destocking pressures and slower infrastructure investment growth. All these, plus this morning’s 30-month low inflation reading reinforces the case for more decisive easing actions soon. We expect another 25bp rate reduction and 100bp worth of reserve ratio cuts within 3Q. The next rate cut could be delivered in the coming weeks, if not days.”

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.